Germany

Overall construction activity

2023 was the third year of a weak phase in the German construction sector. While real GDP fell by 0.3%, construction investments fell by 2.7% on a price-adjusted basis. This was the third consecutive year of decline. The construction labour market painted a different picture, with average employment in the sector rising by a further 0.5% year-on-year to 2.65 million.

While construction output had been severely constrained by material shortages in previous years, this was no longer the case in 2023. The sharp rise in construction material prices, particularly in 2022, also came to a virtual standstill last year. Declines have already been recorded for some product groups, but otherwise price increases have levelled off significantly. Although this trend is likely to continue in 2024, construction prices for some materials will remain at a high level. While a further significant increase in construction prices of 7.9% was observed in 2023, prices are expected to fall by around 1% in the current year.

In a survey in early 2024, 68% of companies cited energy and raw material prices as a risk to their business. The shortage of skilled labour was cited by 62%, followed by demand for construction services (55%) and the level of labour costs (54%). As in previous years, construction companies are particularly concerned about the economic policy environment and labour costs.

The earnings situation, which had improved continuously until 2020, has deteriorated since then. Both returns and equity capitalisation have fallen. As a result, the number of insolvencies in the construction sector rises by 12% in both 2022 and 2023.

Construction new orders show a markedly different trend in 2023. Overall, price-adjusted new orders fell by 4.4 %. An increase of 3.0 % in civil engineering was offset by a significant decline of 11.4 % in building construction, mainly due to a slump of almost 20 % in orders for residential construction. New residential construction therefore remains the biggest problem for the German construction industry.

Expectations for 2024 in the construction industry are negative. Construction investments are expected to fall by a further 2.7 % in real terms, with very different trends in the various construction sectors. Civil engineering will fare much better, with growth of 2.5%, than building construction, which will fall by 3.5%. This is particularly pronounced in residential construction at 4.5%. For the first time since 2008, employment is not expected to grow, with the number of people in work remaining at last year's level.

Housebuilding

Residential construction dominates the construction sector in Germany, accounting for 61% of total construction investments. Its extremely weak performance therefore has a particularly strong impact on the market as a whole. While investment in existing housing is likely to remain stable until 2024 thanks to various government support measures, new residential construction is expected to continue to fall sharply.

Two factors in particular will have a negative impact. First, mortgage interest rates have risen from 1.3% to over 4% in just two years and are not expected to fall significantly this year. This makes it more expensive to refinance housing investment. At the same time, construction prices have also risen sharply over the past two years, driven by high building material prices, and are now around a third higher than in late autumn 2021. Many private households are unable to afford residential property under these conditions, and many commercial investors are finding it difficult to achieve the rents on the market that reflect the financing and construction costs.

This is also reflected in the number of planning permissions, which will fall by 27% in 2023, the sharpest decline since 2007. While the number of approved flats for rent fell by 25%, the figure for detached and semi-detached houses was even higher at more than 40%. While the government has set a target of 400,000 new homes per year, only around 270,000 homes are likely to have been completed last year and a further significant decline to a maximum of 230,000 homes is expected by 2024. 

Although the government has adopted a number of measures to support new residential construction (subsidies for climate-efficient new buildings, better depreciation conditions), these are nowhere near enough to lure investors back into the market. This is also reflected in the order book. It has fallen from a peak of 6.1 months in February 2022 to 3.3 months in February 2024, the lowest since 2016. 

The government has set a target of making Germany's building stock carbon neutral by 2045. This will require a significant increase in investment in energy-efficient renovation. Growth in this sector is therefore expected to outpace new construction in the medium term.

Non-residential construction

80% of non-residential construction is in the commercial sector. The ongoing weakness of the German economy has left its mark on new construction in 2023, both in terms of approvals and new orders. Many investors, especially in industry, are holding back on their investment plans due to the weak economy, and new momentum is not expected until 2025. New orders in this sector will fall by 10% in real terms in 2023.

In contrast, expectations for the current year are more positive for public building construction. Driven in part by a number of major projects, new orders rose sharply last year, by 20% in real terms, so that a significant increase in output is expected for the current year.

The energy-efficient renovation of existing buildings is expected to remain stable. Despite last year's decline, energy prices remain high, making retrofits profitable in the long term. In addition, political pressure to make existing buildings climate-neutral is likely to increase.